Question

Suppose that the demand curve for pizzas (in thousands per day) is given by P =...

Suppose that the demand curve for pizzas (in thousands per day) is given by P = 12 – 0.5Q. Calculate the price elasticity of demand if the price is equal to $6. Give and explain one factor that could cause the elasticity of demand for pizzas to increase.

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Answer #1

P = 12 – 0.5Q
0.5Q = 12 - P
Q = 24 - 2P

Taking derivate of Q wrt P:
dQ/dP = - 2

At P = 6, Q = 24 - 2*6
Q = 12

Elasticity of Demand = (dQ/dP)*(P/ Q)

= (-2)*(6/12)

= -1

One factor that could increase the price elasticity of demand for pizzas:

- Availability of Close substitutes: If a good has more substitutes, then its elasticity will be higher. A small increase in the price of Pizzas would ask the customer to shift their consumption to other substitutes like burgers, hot dog etc. Consumers here are price sensitive and change their preferences towards the good quickly.

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